Absence of First-Time Buyers Causes Concern

As the housing sector continues its upward climb, property values continue to rise. The recent improvements have accounted for 14 straight months of increasing home prices across the entire United States. While the lack of inventory has facilitated the need for bidding wars and increased consumer participation, there remains a distinct population that has yet to partake in the immediate frenzy. The current market is surprisingly void of first-time buyers. As a result, potential first-time buyers are losing out as home sales continue their upward trend.

First-time homebuyers, who accounted for 34 percent of all existing-home purchases last year, only accounted for 28 percent this year. The six percent decrease reveals a potentially disturbing trend, as first-time buyers were 36 percent of the market two years ago. The numbers mark a three-year regression for this specific population. Their lack of participation could hinder the housing recovery.

Unfortunately, those that have neglected to take advantage of the current market may be too late. The record-low mortgage rates have already continued to climb and show no signs of slowing down. June witnessed the average rate for 30-year-fixed loans exceed four percent for the first time since the latter part of 2011.

“The people buying homes today … are participating in home price growth. Younger people, they are being left out,” says Lawrence Yun, chief economist for NAR. “It remains to be seen when the first-time buyer can return.”

According to a 2012 report issued by the National Association of Realtors (NAR), four of 10 homebuyers are considered to be “first-timers.” As 40 percent of the market, first-time homebuyers are critical to the success of the housing sector. Their presence allows existing-homeowners to sell their house while moving on to a more expensive one. The absence of first-time homebuyers serves to cripple the cycle as a whole.

Understanding the roles of first-time homebuyers is critical to analyzing the housing sector. Therefore, it is import to understand why their absence is a hindrance to the recovery. The following factors have reduced the presence of first-time buyers in the market:

Competition: First-time homebuyers were in direct competition with cash buyers, who accounted for 33 percent of the existing home sales in May. Cash buyers are tough competitors, especially in markets with limited inventory and for first-time buyers who often use low down-payment loans to finance purchases.

Tight Credit: Home loans are harder to get than before the housing bubble, and that remains true for first-time buyers. Almost half of first-timers get low down-payment loans through the Federal Housing Administration.

Recession: While younger generations have made a strong comeback, it takes years of steady employment to build credit and save for a down payment. It is likely that many first-time buyers are struggling to save for an adequate down payment.

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